AAPL: VZ Numbers Reassure iPhone View, But Is It Enough?

By Tiernan Ray

Apple (AAPL) shares today have resumed gains they held in the morning, after briefly dipping, following word from Verizon Communications (VZ) that it activated 6.2 million iPhones last quarter, reinforcing the bulls’ view on Apples fiscal Q1 that ended last month. The results for the quarter will be reported tomorrow afternoon after the market closes.

The stock is currently up $3.41, or 0.7%, at $503.41.

Verizon noted that half its iPhone activations were for LTE models, meaning the iPhone 5.

Brian White of Topeka CapitalMarkets reiterates a Buy rating and a $1,111 price target, writing that it was a “strong” iPhone quarter, and backs up his view for iPhone units way above Street consensus:

Over the past six quarters, Verizon has accounted for approximately 11% of Apple’s total iPhone shipments. Using this 11% number, we can easily back into a greater than 56 million iPhone shipment number in the quarter. Even with 12% penetration, we can get over 51 million. The iPhone accounted for 63% of the total smartphone activations at Verizon and well above the average of 47% over the past five quarters and the highest penetration rate we have on record since 3Q11. The next highest penetration rate was 56% in 4Q11 with the launch of the iPhone 4S.

Maynard Um of Wells Fargo reiterates an Outperform rating, and a $680 to $730 “valuation range,” writing that the 6.2 million suggest “Verizon will account for roughly 13% of our total iPhone units of 48MM.”

“Given a historical range of 9.1% to 11.6% in the prior four quarters, we believe Verizon’s unit activation number supports our forecast and, in fact, suggests some potential upside.”

Keith Bachman with BMO Capital reiterates an Outperform rating, writing that the 6.2 million was “modestly above our 5.6 million iPhone estimate.”

But Bachman is dissatisfied by the number of implied iPhone 5units, and thinks further cuts to his average selling price estimate may be required:

Despite launching late in the September quarter, the iPhone 5 contributed only 3.1 million units in the December quarter, or approximately 50%. We believe the lower mix of iPhone 5 units will put downside pressure on ASPs. In past product launches, the new generation of iPhone models would account for the vast majority of sales, which helped ASPs.

William Power of Baird reiterates an Outperform rating on the shares, and a $750 price target, writing that the numbers back up his projection for “16 million+ iPhone sales in the U.S. in Q4, which in turn should support our 48.5 million global forecast.”

Unlike Bachman, he’s not worried about the mix of iPhone 5s:

[…] sales were evenly split between iPhone 5 and a combination of iPhone 4/4S, which we believe could benefit margins. We would note this was the first time Verizon has offered a free iPhone (iPhone 4), which we believe was a key driver.

Not everyone today was completely fixed on the Verizon numbers. Avondale Partners‘s John Bright reiterated a Market Perform rating and a $600 price target, writing that tomorrow’s report may be better than expected on the revenue front, with perhaps $55.7 billion in revenue and $13.06, versus $54.9 billion and $13.45 Street consensus.

But he thinks Apple’s dominance wanes from here on out:

We expect a record ~49m iPhone shipments in the quarter, driven by the late Sept launch of the iPhone 5, and ~25m iPad shipments as the lower priced iPad Mini extends its accessibility to more price sensitive consumers. Longer-term, however, we see decelerating growth and margin pressure as AAPL’s dominance shrinks.

And Ben Reitzes with Barclays Capital today reiterates an Overweight rating on the shares, and a $740 price target, writing that there should be less focus on Apple’s hardware sales and more focus on the company’s potential revenue from services.

If Apple is to catch up to Google (GOOG) in value, the company has to show that it can be a real force as an “ecosystem” of content and services, he opines:

We have argued that Apple’s shares hit an inflection point to the downside in September 2012 when investors realized that the Apple Maps endeavor was a significant mistake. The maps debacle showed investors how valuable Google’s technology was, how hard it was to replicate and how Apple may struggle as the world moves beyond iTunes toward cloud-based services. In short, our point is Apple needs to up its game in this arena. We are hoping to see the seeds of this innovation when the company previews iOS 7 as early as March in an iPad launch event and then put into action at the WWDC in June. We believe Apple can turn perceptions around with a real move into payments, augmented with technology acquired from Authentec making Apple’s hardware and services the most secure and trusted service […] Google trades at 15x forward 12-Month EPS vs. 10x for Apple. If Apple launches a new lineup of iPhone hardware including a version with a larger screen and a model for emerging markets (our checks back both in development), that would be a nice start. But investors need to perceive yet again that Apple is a platform company that can fix itself and thrive (much like Facebook over the last few months or as Google has done over the past year and a half). We believe new services could help Apple’s multiple recover by 2 points rather quickly, equating to about a $100 move.

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